Answer to Question #223029 in Microeconomics for Raksha

Question

Which of the following best describes the labor market from the perspective of a single firm in a perfectly-competitive labor market?


Unit-elastic supply and demand for labor
Perfectly inelastic supply of labor and downward sloping demand for labor
Perfectly elastic supply and demand for labor
Perfectly inelastic supply and demand for labor
Perfectly elastic supply of labor and downward sloping demand for labor

Answer 1

Answer: Perfectly elastic supply of labor and downward sloping demand for labor is correct.

The firm in a perfectly competitive labor market is only a wage taker,accept the wage rate in the market just like as perfectly competitive firm. The market wage rate in a perfectly competitive market is the the firm's marginal cost of labor that the amount the firm should pay for each additional worker. The firm hires workers up to that point where marginal revenue product of last worker is equal to wage rate. So, there arises perfectly elastic supply of labor.

The demand for labor is downward sloping due to decreasing returns scale. As more workers employed, their productivity will diminish after certain point of time so demand for labor will decrease facing downward sloping demand.